Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business App. I'm pleased to say
Speaker 2: that joining us now is the seventeenth United States Secretary
Speaker 2: of Energy, self described energy nerd turned entrepreneur now dedicated
Speaker 2: his time to public services. Mister Secretary Chris Right, thank
Speaker 2: you very much for joining Bloomberg Surveillance this morning. We
Speaker 2: appreciate your time. We just wanted an initial reaction from
Speaker 2: you to the tariffs we heard retaliated by China overnight.
Speaker 3: What's your reaction this morning, sir.
Speaker 4: Oh, I think you see we're right in the midst
Speaker 4: of a negotiation. This is home territory for President Trump,
Speaker 4: both in his business career.
Speaker 5: And his first term as president.
Speaker 4: You know, he reads the marketplace, he engages with people,
Speaker 4: he uses leverage, and we're gonna get to a great result.
Speaker 4: We're seeing in the midst of it right now. But
Speaker 4: I'm quite optimistic about where we're going.
Speaker 6: Well, the United States has already slashed it's forecast for
Speaker 6: global oil demand. If we continue on this path of
Speaker 6: a trade war, do you expect demand to continue to decelerate?
Speaker 4: Oh, Their prediction of the demise of demand growth for
Speaker 4: oil is is older than I am. So Look, there's
Speaker 4: cyclical factors on economic growth that do impact at the
Speaker 4: long term growth rate of oil little more than a
Speaker 4: million barrels of oil per day per year has been
Speaker 4: going on for decades. I don't see any big change
Speaker 4: in that in the foreseeable future. You see a marketplace
Speaker 4: right now that is worried about economic growth, and I
Speaker 4: think you're seeing some softening in oil prices from that.
Speaker 4: But I think that fear, I think that fear is misplaced.
Speaker 4: I think we're going to end out in a better
Speaker 4: economic situation than we went into this Trump term, I
Speaker 4: think by a long shot. Look, two things are driving
Speaker 4: tariff policy for President Trump. One is we've been very
Speaker 4: welcoming to exports from other nations. We want other nations
Speaker 4: to be just as welcoming of US exports, so we
Speaker 4: can grow our exports more in line with our imports.
Speaker 4: And President Trump wants to see America reindustrialize, investment, jobs,
Speaker 4: and heavy industry back in our country.
Speaker 5: Both those are going to be wonderful for the United States.
Speaker 7: Well, it's not just.
Speaker 6: A softening of oil prices, mister secretary. I'm sure you've
Speaker 6: seen that since Trump's inauguration, prices are down more than
Speaker 6: ten dollars. At what level do you think you can
Speaker 6: see drill baby drills? The President likes to call it
Speaker 6: when it comes to shale producers, because what we're hearing
Speaker 6: is that they cannot do this if price is fall
Speaker 6: fifty dollars a barrel.
Speaker 5: Yeah.
Speaker 4: Look, investment decisions of oil and gas companies in the
Speaker 4: US and abroad or based on a little bit of
Speaker 4: multi year view of oil and gas prices. They're not
Speaker 4: moved based on the spot price of oil today, or
Speaker 4: oil last week or oil next week. So these are
Speaker 4: longer term decisions that are being made. We saw oil
Speaker 4: and gas prices move down immediately after President Trump was elected,
Speaker 4: and that was the market seeing, Oh, yes, all the
Speaker 4: nonsense that's tried to kill the oil and gas industry,
Speaker 4: promised it'll be over soon, stopped giving permits on federal lands.
Speaker 4: All that stuff is going away, and so there's much
Speaker 4: more of a green light on production. So if you
Speaker 4: put more supply into a marketplace, you're going to get
Speaker 4: lower prices. Now we're seeing, as they said, that sort
Speaker 4: of extra fear of world economic growth in the next
Speaker 4: few months over the tariff dialogue.
Speaker 5: That's real fear.
Speaker 4: But I think the marketplace may be discounting the wrong
Speaker 4: answer here. We're going to see very very positive economic
Speaker 4: growth in the next few years.
Speaker 6: But is it still realistic to be talking about adding
Speaker 6: the United States adding another three million barrels of production
Speaker 6: at these prices?
Speaker 4: Well, I think you're referring to Scott Besson's plan there,
Speaker 4: and his three millions was three million barrels of oil equivalent.
Speaker 4: Most of that growth will come from natural gas, and
Speaker 4: of course the domestic demand for natural gas with the
Speaker 4: growth of AI resourcing manufacturing and our surging exports.
Speaker 5: Boy, yes, we will grow oil equivalent.
Speaker 4: Production by at least that much during President's term. But
Speaker 4: we will also grow oil production and other liquid natural
Speaker 4: gas liquid production in the United States as well. So
Speaker 4: absolutely are we going to see strong growth in American
Speaker 4: energy production one hundred percent.
Speaker 6: Mister Secretary, You've been on a tour in the Middle
Speaker 6: East for about two weeks since our understanding that before
Speaker 6: Saudi Arabia decided to add even more barrels to the market,
Speaker 6: there was a conversation, a dialogue between the Trump and
Speaker 6: Minute registration and the Kingdom. Can you give us a
Speaker 6: sense of what that dialogue looked like. Is the United
Speaker 6: States supportive of OPEC plus adding more barrels to this market.
Speaker 4: Yeah, we don't directly coordinate on oil production policies or whatever.
Speaker 4: That's certainly an OPEX purview. But I don't think anyone
Speaker 4: in the world misunderstands President Trump's desire to see more
Speaker 4: energy produced, therefore lower prices and more economic activity. Absolutely,
Speaker 4: that's President Trump's agenda. Look at his genda can be
Speaker 4: summarized as prosperity at home and peace abroad.
Speaker 5: Lower oil prices.
Speaker 4: Help both of those, and the piece abroad that's the
Speaker 4: most concern right now. In the region where I am
Speaker 4: in the Middle East is Iran. Iran over during the
Speaker 4: Biden administration, oil prices were higher. There was sort of
Speaker 4: an appeasement attitude and no strong enforcement of sanctions, enormous
Speaker 4: funding de Hamas to Hesbaala to the Huthis, and a
Speaker 4: rapid advancement of their nuclear program. President Trump's agenda is
Speaker 4: exactly the opposite that it's peace through strength. But we
Speaker 4: simply cannot and will not accept a nuclear armed Iran.
Speaker 6: Well, when it comes to Ron, we saw even more
Speaker 6: sanctions on the regime yesterday. When it comes to these
Speaker 6: oil sanctions, the President has said he wants to go
Speaker 6: back to maximum pressure. Is that part of the conversation
Speaker 6: you're having with golf allies on this tour that they'd
Speaker 6: be willing to step in if some of those Iranian
Speaker 6: barrels come off the market.
Speaker 4: Well, fortunately, just from the United States production itself and
Speaker 4: the size of the global oil market today, Absolutely, we
Speaker 4: can tolerate squeezing out Iranian exports. That and of course,
Speaker 4: do all the golf neighbors want the same thing we want?
Speaker 5: Yes.
Speaker 4: Do they fear a nuclear armed Iran? Absolutely? Do they
Speaker 4: think now is the time to turn the screws and
Speaker 4: end Iran's nuclear weapons program? Absolutely? But yeah, can the
Speaker 4: world tolerate that absolutely. Years ago, twenty years ago, could
Speaker 4: this have happened? No, But today we both have large
Speaker 4: American oil production, better relations with our neighbors, and a strong,
Speaker 4: resolute leader. In forty years of trouble, forty five years
Speaker 4: of trouble from Iran, we've never had a better chance
Speaker 4: to reduce Iranian power, reduce Iranian tyranny in the Middle East,
Speaker 4: and we don't want to miss that opportunity.
Speaker 6: As a secretary, the President has said a lot, even
Speaker 6: recently to me on Air Force One, he likes that.
Speaker 6: Guess oil prices are coming down? Do you and the
Speaker 6: President have a price in mind.
Speaker 4: No, I think my whole life, I've avoided predicting prices
Speaker 4: or dictating prices. We have a wonderful free market economy.
Speaker 4: That's what makes the world wealthier. That's what allows consumers
Speaker 4: to continually re express choices in every direction.
Speaker 5: So no, there's no formula for a good oil price.
Speaker 4: There's just a broader belief that lower cost diesel, lower
Speaker 4: cost gasoline, lower cost home heat, lower cost electricity, all
Speaker 4: of those are good for American consumers and good for businesses.
Speaker 4: That's President Trump's energy agenda and I'm here to implement.
Speaker 2: It, Miss the Secretary, appreciate your time this morning, this
Speaker 2: evening where you are. Thank you very much for being
Speaker 2: with Blimberg TV. The Energy Secretary there, Chris right. This
Speaker 2: is what Sarah Hunt of our pint Saxon was has
Speaker 2: to say. The damage has been done both to markets
Speaker 2: and to sentiment. Goes on to say, what we do
Speaker 2: know is that the uncertainty is likely to continue. Sarah
Speaker 2: joins us.
Speaker 3: Now for more.
Speaker 2: Sarah and Mornick, good morning. How much weight can you
Speaker 2: put on the guidance from the banks this morning?
Speaker 1: Well, I think it's interesting that they're giving guidance at all,
Speaker 1: because I expected a lot more of a not necessarily
Speaker 1: pulling guidance, but a larger uncertainty.
Speaker 7: We were going to bracket things.
Speaker 1: So I think that there is a call to strength
Speaker 1: there that says, you know what, we see what's going on,
Speaker 1: We see what's going on in fixed income markets, and
Speaker 1: see that this is actually going to be a decent
Speaker 1: year for us. And I think for the bigger banks
Speaker 1: that's an easier thing to say than it is for
Speaker 1: some of the smaller events.
Speaker 2: I think how positive people were coming into twenty twenty
Speaker 2: five sentiment sky high. Long growth will improve. Capital markets
Speaker 2: activity is going to be fantastic. Lisa was asking this
Speaker 2: question in the last thirty minutes or so. The capital
Speaker 2: market's activity now for the financials delayed or derailed? Which
Speaker 2: one is it.
Speaker 1: I'm going to say delayed. I don't think it's necessarily derailed.
Speaker 1: I think that ultimately. You know, what was interesting about
Speaker 1: the comments that you brought up earlier in Marie was
Speaker 1: that in that long list were some of the things
Speaker 1: that are supposed to be positive, which is the deregulation,
Speaker 1: and which is some of the mergers and acquisitions and
Speaker 1: stuff that we were.
Speaker 7: Talking about going into this.
Speaker 1: But the fact that the tariffs came so soon, and
Speaker 1: the tariffs came so hot relative to what the expectations were,
Speaker 1: I think has got everybody going losing sight of the
Speaker 1: fact that there may be other things, and I'm not
Speaker 1: sure any of us know exactly what that's going to be.
Speaker 8: Is the market reacting to the hot rhetoric, or is
Speaker 8: the market reacting to market structure issues that are amplifying
Speaker 8: moves that are then causing people, for lack of a
Speaker 8: better word, freak out.
Speaker 1: So this is another problem where the answer is yes,
Speaker 1: because it's all the things right. It's both they're reacting
Speaker 1: to the moves, and there is some there have been
Speaker 1: some ongoing discussions about what's going on underneath the markets
Speaker 1: and whether there's anything going on within the structure of
Speaker 1: the treasury basis trade, this the FX markets.
Speaker 7: So I think that.
Speaker 1: There's a combination of things where you get the first
Speaker 1: reaction on fundamentals, and then the second reaction comes from
Speaker 1: things that we're not necessarily able to see.
Speaker 7: Where are we in that?
Speaker 8: I mean, is there a sense that there's something that
Speaker 8: just blew up, or there's something that's in the process
Speaker 8: of blowing up, and we're watching it and then creating
Speaker 8: a narrative around American exceptionalism around it, and then adding
Speaker 8: some narrative talk about that, and everyone's running to the edges.
Speaker 7: And just hiding.
Speaker 8: I mean, I'm trying to figure out the anatomy of
Speaker 8: what is going on. After a really tumultuous couple of weeks.
Speaker 7: I think that you are not the only one.
Speaker 1: I think all of us are trying to figure out
Speaker 1: what's been going on underneath the surface and or the
Speaker 1: size of some of these moves. How problematic that is
Speaker 1: because so many firms have levered up more and more
Speaker 1: as we've had less volatility, and then you get volatility
Speaker 1: that is off the charts, and you have to think
Speaker 1: that there are some reactions to that, and some of
Speaker 1: those are going to be people making a lot of money,
Speaker 1: and some of them are going to be the opposite.
Speaker 1: And I don't think we have an understanding right now
Speaker 1: of which is the bigger piece of that. As money
Speaker 1: also moves out of the US and goes to other
Speaker 1: places which are smaller than the US, so therefore the
Speaker 1: effects are magnified. So I think that there are a
Speaker 1: lot of different parts of that equation, and I'm not
Speaker 1: sure that we're able to simultaneously solve it right now.
Speaker 6: The Treasury Secretary said yesterday they're going to go through
Speaker 6: the queue when it comes to these deals they're making
Speaker 6: with other countries, and then there's going to be a
Speaker 6: period of quote, great certainty after these ninety days.
Speaker 5: That what you expect ninety days and you get some
Speaker 5: certainty in the market.
Speaker 1: I would love to see great certainty in ninety days.
Speaker 1: I'm not sure that you're going to get great certainty
Speaker 1: because I think that as we go through all of
Speaker 1: these things, there's going.
Speaker 7: To be continuous changes.
Speaker 1: So I think that if you take some of the
Speaker 1: uncertainty off the table, which.
Speaker 7: We haven't yet at all.
Speaker 1: And I think that there was some expectation that once
Speaker 1: the announcements were made, that was going to be a
Speaker 1: catalyst in and of itself from an uncertainty standpoint, and
Speaker 1: all it's done is that up.
Speaker 7: So I think that there is going to be some.
Speaker 1: As you start to get deals through the pipeline and
Speaker 1: people start to understand what they are, I think that
Speaker 1: will help calm things down. But right now we're still
Speaker 1: in that phase where that hasn't happened yet, and I
Speaker 1: think we are that max uncertainty that we all keep
Speaker 1: hoping to get behind just continues on a daily basis.
Speaker 2: As a forward multiple on the SMP doesn't screen recession
Speaker 2: right now, Camra Dawsum, might that point in the last
Speaker 2: hour from your perspective, given the price move we've already seen,
Speaker 2: do you think we have the capacity to absorb back
Speaker 2: news now going into the next several months where we
Speaker 2: might see some pretty big downside surprices on data.
Speaker 7: Well, I think that.
Speaker 1: We came into this year with the market and even
Speaker 1: elevated at multiple than it was right now. So is
Speaker 1: it back to a place where you can feel very
Speaker 1: comfortable with it. No, which is why I think that
Speaker 1: you've got risks to the upside and risk of the downside.
Speaker 1: Because you get really good news in this market wants
Speaker 1: to take off, you get really bad news, and we
Speaker 1: can say, you know, the multiple still expensive and it
Speaker 1: can still come down a little bit. I think that
Speaker 1: what we're looking for is a very choppy year, unfortunately,
Speaker 1: and some hope that as you get through some of
Speaker 1: these issues in terms of understanding what's going to happen,
Speaker 1: people can start making decisions and that delayed economic activity
Speaker 1: doesn't accelerate too much.
Speaker 2: So in the meantime, we just want some way to hide.
Speaker 2: Some people do anyway, some people more aggressive than that.
Speaker 2: But if you want a tin hat and a rock
Speaker 2: to hide under right now, it's not the treasury market.
Speaker 3: What is it.
Speaker 7: It's not the treasury market.
Speaker 1: It's some of the areas that have done fairly well
Speaker 1: in general recessions. Those things like consumer staples, they got
Speaker 1: really really cheap at the end of last year, and
Speaker 1: everybody was looking for more exciting things and more growth,
Speaker 1: and then you look at those multiples, you go, you
Speaker 1: know what, that's not so scary. Some of the defense
Speaker 1: stocks have gotten killed also, and so I think that
Speaker 1: there's some opportunity there. There are some places, even something
Speaker 1: like Walmart. Look at the big banks, there are places
Speaker 1: where they can absorb it. I think the harder thing
Speaker 1: is going to be for smaller and MidCap stocks, because
Speaker 1: the uncertainty is very high right now, and I think
Speaker 1: for them it's much more difficult.
Speaker 8: I want to set on one point that you said
Speaker 8: and make this full circle. The big banks coming into
Speaker 8: this year, a lot of people were really excited about
Speaker 8: them because of the growth in the economy that they
Speaker 8: were expecting, as well as deregulation wave. That's something that
Speaker 8: we heard from Jamie Diamond that the deregulation is going
Speaker 8: to be a real positive. We also are seeing that
Speaker 8: steeper yield curve that could also benefit these banks in
Speaker 8: some ways. Are the banks that have in in good
Speaker 8: times and that given how much they've built capital and
Speaker 8: what a different position they're in now than pre pandemic.
Speaker 1: I think that it's a much Yes, I think it's
Speaker 1: a much different situation for them now. But I also
Speaker 1: think if you look back when all the technology stocks
Speaker 1: are outperforming, the banks are underperforming. So in good times
Speaker 1: they tend to lag a little bit, and in bad times,
Speaker 1: I think people go, oh, my goodness, there's a great
Speaker 1: business model, and we're all looking at cash those we're
Speaker 1: all looking at balance sheets again, all of those things
Speaker 1: become of utmost importance when you have this much volatility.
Speaker 2: Can we finish on tech? What becomes of Apple if
Speaker 2: we don't get an exemption for that name? What happens
Speaker 2: to some of these companies.
Speaker 1: I don't necessarily want to speculate on what happens to
Speaker 1: Apple if it doesn't get an exemption.
Speaker 2: I think that is it not bad that you couldn't
Speaker 2: possibly even speculate, Well.
Speaker 1: I mean you can sure, you can speculate, and you
Speaker 1: can say, well, ninety percent of their phones are coming
Speaker 1: from here, then we lose x amount. I think the
Speaker 1: problem is it is such and I mean this goes
Speaker 1: back to those discussions in twenty eighteen and twenty nineteen
Speaker 1: that the tech stocks are actually staples of themselves because
Speaker 1: are you.
Speaker 7: Going to live without an iPhone?
Speaker 1: And how many people are going to say, Okay, now
Speaker 1: I'll just go back to the method of financing it
Speaker 1: that the phone companies used to do, and I won't
Speaker 1: buy it outright, so that two thousand dollars doesn't become
Speaker 1: as scary as twelve hundred dollars. They're expensive things to
Speaker 1: start with, but I think that the ingrainedness of that
Speaker 1: technology into our lives is difficult to separate.
Speaker 7: So I don't know that for that.
Speaker 1: Reason, it's as bad as it would be because it's
Speaker 1: not a lot of speculative buyers of iPhones.
Speaker 2: So Rahan, I appreciate it. Of Vutpant Saxon Woods. We
Speaker 2: begin this out with stocks fluctuating. It's earning season kicks
Speaker 2: into full gear, so Vita suplimanning. But Bank for America
Speaker 2: writing first quarter beats animisses may not move the needle
Speaker 2: as much as in recent quarters. There is a reasonable
Speaker 2: probability the absence some resolution or clarity transparency could be compromised.
Speaker 2: Savita joined us now for more Cevita, good.
Speaker 7: Morning, Good morning.
Speaker 2: Reflected on the bank earning so far and so far,
Speaker 2: so good. And there's a line that you used over
Speaker 2: the last week that it's dangerous to underestimate companies on
Speaker 2: the S and P five hundred now dangerous is it
Speaker 2: really well.
Speaker 9: I think that my mantra is own cash and stocks,
Speaker 9: sell bonds, because if we're in this environment of inflation
Speaker 9: of you know, even lower growth, I think that's a
Speaker 9: terrible environment for asset classes that have no optionality. When
Speaker 9: you think about stocks, they have lots of options. Companies
Speaker 9: can pull forward cash return, they can you know, they
Speaker 9: have creative accounting mechanisms. So there's a lot of optionality
Speaker 9: that companies have that the bond market doesn't. When I
Speaker 9: think about earnings, this this upcoming quarter, you know, who
Speaker 9: cares what happened in Q one? I think the focus
Speaker 9: is going to be on guidance or lack thereof.
Speaker 7: So what worries me.
Speaker 9: Is that a lot of companies intimated that they you know,
Speaker 9: they have to pull guidance, and we saw this in
Speaker 9: twenty twenty with COVID.
Speaker 7: It's not great.
Speaker 9: So what we found is that companies that pull guidance,
Speaker 9: that used to issue guidance typically under perform on average
Speaker 9: by about three percent until they actually start start giving
Speaker 9: us guidance. So it's understandable that these corporates can't give
Speaker 9: us guidance. Who knows, I mean, it's a it's a
Speaker 9: very uncertain environment. But that transparency that we used to
Speaker 9: have in the s and P. Five hundred has been compromised,
Speaker 9: and I think that's the key risk.
Speaker 2: Can we talk about the playbook for you and the team.
Speaker 2: Have you spent some time on the stagflash playbook.
Speaker 5: We have.
Speaker 9: We've spent a lot of time on that playbook. We've
Speaker 9: spent a lot of time on the tech bubble, you know,
Speaker 9: de Rating Playbook two thousand and eight, and I think
Speaker 9: this environment rhymes with all of those. During a stagflationary environment,
Speaker 9: you want it to be in stocks over bonds. You
Speaker 9: want it to be in value overgrowth.
Speaker 7: So you wanted to.
Speaker 9: Basically buy cash and cash yield and that's where cap
Speaker 9: value comes in. And that's still you know, I still
Speaker 9: see this as a very unusually attractive size and style
Speaker 9: box in the s and P. Five hundred, nobody talks
Speaker 9: about large cap value anymore because it hasn't worked for
Speaker 9: such a long time.
Speaker 5: But if you think about these companies, these are you know.
Speaker 9: Kind of big companies that have rationalized capacity, are focused
Speaker 9: on returning cash. You know, energy companies have transformed their
Speaker 9: philosophy from drilling and capex to cash return above everything else,
Speaker 9: and these are companies that actually benefit from a little
Speaker 9: bit of inflation, which we're likely to get if we
Speaker 9: see these tariffs go.
Speaker 7: Through in any way, shape or form.
Speaker 8: Well, how much you look at companies that are really
Speaker 8: domestically based too, and not necessarily international.
Speaker 9: Yeah, so this is the tricky part because a lot
Speaker 9: of companies that are domestically based are the buyers or
Speaker 9: suppliers or in some way maybe more vulnerable than the
Speaker 9: multinational companies that actually have the foreign exposure. So I
Speaker 9: think that's where you really want to dig down and
Speaker 9: see what their externalities are, what their dependencies are, and
Speaker 9: if that's on. If you've got a domestic company that's
Speaker 9: dependent on a big MNC, you know it's not a
Speaker 9: great situation. This is why I don't think small caps
Speaker 9: are really the safe haven in this type of environment.
Speaker 9: I think what's interesting, though, is if you look at
Speaker 9: the multinationals, they may have more options than we think.
Speaker 7: So I think.
Speaker 9: Tech aside other companies in the US have shown a
Speaker 9: lot of resilience during periods of macro volatility. So you
Speaker 9: think about what we've experienced over the last four or
Speaker 9: five years, We've had inflation go from negative to nine
Speaker 9: percent to three wherever we are now, and that could
Speaker 9: go higher. But during that period, US corporates actually saw
Speaker 9: very little in terms of margin risk. So I think
Speaker 9: that's the lesson that we have today is the idea
Speaker 9: that we could actually see margins hold up better than
Speaker 9: expect did.
Speaker 8: A week ago, you downgraded your expectation from the sixty
Speaker 8: six hundred range to fifty six hundred, which is still
Speaker 8: an upside from where we are today. And I just
Speaker 8: wonder what leads that if it's not going to be
Speaker 8: big tech, and if potentially you have bond yields that
Speaker 8: are not going to be cooperative into potentially a stagflationary
Speaker 8: type of environment.
Speaker 9: Yeah, I think large cap value gets us there. I
Speaker 9: think you without participation of tech, without I mean tech
Speaker 9: could flatline tech could even go down as it has already,
Speaker 9: and we could see the market end a little bit higher.
Speaker 9: And I think the idea is where we haircut or
Speaker 9: target is not necessarily the equity risk premium, but really
Speaker 9: the risk free rate. And if you think about it,
Speaker 9: the risk free rate is a ten year T bond
Speaker 9: yield and that has all of a sudden taken a
Speaker 9: step function higher in terms of its risk, I mean
Speaker 9: foreign demand. We've got a buyer strike. There's still a
Speaker 9: lot of US Treasury bonds owned by foreign foreign regions.
Speaker 9: So I think that's the risk, is that you see
Speaker 9: that risk free rate no longer be risk free, and
Speaker 9: it's actually one of the riskiest areas in in the
Speaker 9: capital market spectrum. That said, when you look at companies
Speaker 9: that can benefit from rising rates and rising inflation, that
Speaker 9: really firmly falls into that value bucket. It's energy, It's
Speaker 9: even financials. Financial companies. Big financial companies have de levered
Speaker 9: and are actually in a pretty good place right now
Speaker 9: if we still want America to grow, and I think
Speaker 9: that's that's part of the policy mantras.
Speaker 7: Make America grow again.
Speaker 9: Who's gonna lend money to these companies, probably some of
Speaker 9: the larger US banks.
Speaker 7: I think that's the next leg.
Speaker 9: Energy is a great place to be if you're in
Speaker 9: a stagflationary setup absenter recession. I don't think we get
Speaker 9: the FED to cut because I think you know, that
Speaker 9: would require a meaningful down draft in inflation that they're
Speaker 9: just not seeing. So we have the FED on hold
Speaker 9: this year, and that's an environment where you still wanna
Speaker 9: own cash, cash return, anything that's got that short duration,
Speaker 9: you know, kind of characteristic when it.
Speaker 6: Comes to trade in terwris. Do you think the risk
Speaker 6: is that it hits earnings more or actual growth?
Speaker 7: You know, it's a good question.
Speaker 9: I think it hits growth in the near term because
Speaker 9: it's very difficult to plan and do anything when you
Speaker 9: don't know what the what the playing field is going
Speaker 9: to look like. That said, companies have generally been able
Speaker 9: to navigate periods of uncertainty, and I guess I would
Speaker 9: highlight we're always in a period of uncertainty. I mean, today,
Speaker 9: we know that Trump just came out.
Speaker 7: President Trump came out.
Speaker 9: With this this package that's potentially worse than expected. But
Speaker 9: you know, the two years ago we could have had
Speaker 9: the same type of uncertainty. We've had COVID, We've had
Speaker 9: other types of shocks that corporates have handled. So I
Speaker 9: guess I look at this and I think, okay, companies
Speaker 9: are sitting there kind of waiting for clarity. But we
Speaker 9: know that China is the culprit here. We know that
Speaker 9: that's where the US as playing hardball. We've had a
Speaker 9: stay of execution on other regions at least for ninety
Speaker 9: days or you know, we'll see, But I think that
Speaker 9: at least we know kind of a little bit more
Speaker 9: than we knew prior to Liberation Day.
Speaker 2: We played this guy back in twenty eighteen, and it
Speaker 2: was far worst for equacies, far worst for credit, and
Speaker 2: the tarifs were nowhere near as high as they are
Speaker 2: right now. How instructive is the twenty eighteen example for you, Well,
Speaker 2: twenty eighteen.
Speaker 9: I think was interesting because companies were pretty good about
Speaker 9: being able to shift their sourcing models. So what worried
Speaker 9: us after April second was that it wasn't like you
Speaker 9: could shift your sourcing model somewhere else. It was like
Speaker 9: everything was under siege.
Speaker 7: Today, I think.
Speaker 9: That's a little bit mollified by the fact that we've
Speaker 9: seen this potential for negotiations outside of China, So I.
Speaker 7: Think that's a positive.
Speaker 9: But when you think about the tariff setup back in
Speaker 9: twenty eighteen, even before that, companies had been pretty aggressively
Speaker 9: shifting sourcing out of China to other regions of the world.
Speaker 9: So I think that's the other kind of takeaway is
Speaker 9: that half the economic activity that we used to do
Speaker 9: with China has been shifted to other parts of the world.
Speaker 2: Is it just too difficult to internalize some of these
Speaker 2: numbers being thrown around. Are they just so large that
Speaker 2: people don't think they're going to happen.
Speaker 9: Well, yeah, I mean I think that, you know, going
Speaker 9: above one hundred percent on tariffs, like our unitary elasticity
Speaker 9: model breaks down. I mean, you know, it's very difficult
Speaker 9: to model that in. But I think the idea is
Speaker 9: that's the region where we're really going to see trade limited.
Speaker 7: But the good news is we've already.
Speaker 9: Been in an environment where companies have been reshuffling away
Speaker 9: from China to other regions of the world.
Speaker 2: Just feels like mutually a shured destruction. People see them
Speaker 2: going on. They don't think they're going to last very
Speaker 2: long because they're just.
Speaker 6: Too high and it can't work. It's full decoupling. You
Speaker 6: have to ask the question, though, is it also de risking?
Speaker 6: Is the United States going to make sure that they
Speaker 6: don't get things like high end chips. One thing I'll
Speaker 6: say about these numbers is we know Trump likes to
Speaker 6: start from.
Speaker 7: A maximalist approach.
Speaker 6: Well, they're above what he promised on the campaign train,
Speaker 6: which was ten percent around the United States. And up
Speaker 6: to sixty percent on China. So I think if you're
Speaker 6: looking at this play play out and it is going
Speaker 6: to be art of the deal, then maybe that's where
Speaker 6: we end up.
Speaker 2: What he promised one forty five and going up. At
Speaker 2: the moment, I'm not sure they've stuff. Savitrio's good to
Speaker 2: see it, Thanks for coming, Thanks for being here, Savita Supermanium.
Speaker 2: There of Bank of America on the sancruity market joining
Speaker 2: us now around the table twenty percent of Pimco. Tony,
Speaker 2: good to see you. It's been a while, Thanks for
Speaker 2: dropping by. I just got one question. Help percent answer?
Speaker 2: This has Japan been dump in US treasuries and how
Speaker 2: would we know?
Speaker 3: Are in the data?
Speaker 1: No?
Speaker 10: Slowly And people talk about China's selling, that they'll start selling,
Speaker 10: but they've been selling since February twenty twenty two when
Speaker 10: Russia invaded Ukraine. They had at that time one point
Speaker 10: one five trillion of US treasuries. Now they have seven
Speaker 10: hundred and fifty billions, so almost four hundred billion has.
Speaker 3: Been sold so far.
Speaker 10: So this idea that China will sell them have an
Speaker 10: impact on the market, well, that's kind of looking in
Speaker 10: the rearview mirror There could be more of that, for sure,
Speaker 10: and it's geopolitically driven, but it's not the determinant of
Speaker 10: yields right now.
Speaker 8: So what is the determinant what's going on right now?
Speaker 10: I think the nervousness you see in the value of
Speaker 10: the US dollar and the concerns and markets reflects this
Speaker 10: a big concept. And I'm going to talk about it
Speaker 10: because I wrote a book on it. It was a
Speaker 10: decade ago and Tom Keene I heard on the radio
Speaker 10: this morning talking about how the Greek yield to a
Speaker 10: thirty year bonds is lower than the US thirty year bond.
Speaker 2: Please tell them hasn't changed?
Speaker 3: And so what that tells us jo?
Speaker 10: And of course has something's different in terms of the
Speaker 10: assessment of credit now. A decade ago when I wrote
Speaker 10: a book, it's called the Kynesian endpoint, the idea that
Speaker 10: our nations can reach practical limits to their indebtedness. Greece
Speaker 10: reached a Keynesian endpoint, could no longer borrow from the
Speaker 10: financial markets because of its credit problems. The UK, under
Speaker 10: this trust twenty twenty two reached a Keynesian endpoint, and
Speaker 10: ever since, Rachel Reeves, the Chancellor of each checker or
Speaker 10: the Treasury Secretary has put the UK in austerity. So
Speaker 10: the US is seeing stress relates the idea of reaching
Speaker 10: practical limits to indebtedness, and it needs the world to
Speaker 10: keep have confidence in the US to fund the high
Speaker 10: level of a deadness that we have. So that's one
Speaker 10: of the major concepts to be thinking about in terms
Speaker 10: of the stress in markets.
Speaker 8: So are you saying that what we have seen this
Speaker 8: week is Donald Trump's Liz Trust moment for the United States?
Speaker 3: I'd rather call it a read my lips moment.
Speaker 10: George Bush nineteen eighty eight convention speech, written by Peggy Newton,
Speaker 10: famous for writing speeches for Ronald Reagan, said the biggest
Speaker 10: takeaway is when he said, read my lips, no new taxes.
Speaker 10: Two years later, as president, he raised taxes because the
Speaker 10: interest on the debt reached the record level three point
Speaker 10: two percent that stands today, that'll be broken next year.
Speaker 10: I say it's a read my lips moment because George
Speaker 10: Bush had to do something that was anathema to the party,
Speaker 10: make a politically difficult decision to raise taxes. So today
Speaker 10: we see with societal upheaval, stress related to difficult choices
Speaker 10: that we have to make because of the high level
Speaker 10: of in deadness, and so we'll have more of these
Speaker 10: read my lips moments ahead stress regarding how much to
Speaker 10: raise taxes, cut taxes, spending, etc. So lots of difficult
Speaker 10: decisions that have to be guided and managed very carefully
Speaker 10: and communicated well so the markets understand where we're headed, Tony,
Speaker 10: how do.
Speaker 6: We get from a read my lips moment though, to
Speaker 6: a list trust moment?
Speaker 10: If there's complete ignorance of what the bond market is
Speaker 10: concerned about, I would think that you would have that moment,
Speaker 10: But so far you see some relenting to the bond market,
Speaker 10: and the James Carvill like remember he said, of course
Speaker 10: he liked to be reincarnated as a bonabista because he
Speaker 10: can intimidate anyone, if anyone, If the policymakers decide to
Speaker 10: say no to the bond market in the sense of
Speaker 10: allowing inflation to write so the Federal Reserve could permit, it,
Speaker 10: could create that moment.
Speaker 3: But it's not.
Speaker 10: And that's why you see Fed Chair Powell being very
Speaker 10: slow and gradual and prudent about rate cuts because it's
Speaker 10: the right thing to do, because high inflation would be
Speaker 10: saying something very negative to the bond markets. So I
Speaker 10: think as if we go on at physically irresponsible path,
Speaker 10: you see the bond market pushing back, and what.
Speaker 3: I would expect.
Speaker 10: Then the final word is a hall of mirrors effect
Speaker 10: where not only are investors looking at policymakers, but policymakers
Speaker 10: are looking at markets because they matter a great deal
Speaker 10: now with the high level of debt that the US has,
Speaker 10: aren't we there.
Speaker 6: Right now policymakers looking at markets. Donald Trump even talked
Speaker 6: about that the bond market was a bit queasy overnight.
Speaker 10: It happened now, But in a multi dimensional game of
Speaker 10: chess that you know Donald Trump plays, if you think
Speaker 10: he's thinking that, then you've got to think something else.
Speaker 10: Perhaps who knows. So it may be the case that
Speaker 10: policymakers are looking. And the big signal this week from
Speaker 10: policymakers in Washington and Trump's team of rivals is the ascension,
Speaker 10: if you will, of Scott Bessant, the Treasury Secretary, speaking
Speaker 10: more in a fashion in ways that we're used to rubenesque.
Speaker 10: You could say, as we saw under Bill Clinton and
Speaker 10: Robert Rubin's Treasury secretary.
Speaker 8: We were speaking with Greg Peters of PGM Fixed Income earlier,
Speaker 8: and he said that this week really has been a
Speaker 8: game changer for him, that he can't put this back
Speaker 8: in the bottle, you can't unsay certain things, and that
Speaker 8: this really is making him rethink the role of treasuries
Speaker 8: as a safe haven asset, given that if the goal
Speaker 8: is to reduce trade, then essentially there will be less
Speaker 8: dollars overseas to invest naturally in US treasuries. Are you
Speaker 8: thinking about something similar?
Speaker 10: Yeah, And I was looking this morning and anyone could
Speaker 10: on the IMF website the cofer data co fort data.
Speaker 10: It shows how much of the world's twelve trillion in
Speaker 10: reserves put in the US dollar. The figures today fifty
Speaker 10: eight percent. It's been in decline. The next closest nation
Speaker 10: or set of nations is Europe at twenty percent. For
Speaker 10: the Chinese currency. It has this fewer dollars of reserves
Speaker 10: in its currency than in the Canadian dollar. And so
Speaker 10: other point to make though that's just the background. If
Speaker 10: you lined up friends and foes of the United States,
Speaker 10: and I don't need to put anyone in the foes category,
Speaker 10: but just deemed or perceived as foes, you see that
Speaker 10: the nations that are friends would have still have about
Speaker 10: six account for about sixty percent of world reserve assets.
Speaker 10: So if each of the friends and foes went to
Speaker 10: their respective corners, you expect that the amount of money
Speaker 10: held in dollars would still be roughly the same, close
Speaker 10: to six percent, if it went to the extremes.
Speaker 3: That's one major major point. The next one is liquidity.
Speaker 10: Of course, the US bond market this week has seen,
Speaker 10: according to the New York Fed, a seven hundred billion
Speaker 10: or so of daily volume.
Speaker 3: No market comes.
Speaker 5: Close to that.
Speaker 10: This isn't to say that over time we couldn't see
Speaker 10: that fifty eight percent of money held in dollars decline,
Speaker 10: and you have a plurality forty.
Speaker 3: Nine percent in dollars, more in euros, more in the end, et.
Speaker 10: Cetera, et cetera. It's possible, and it'll be gradual. I
Speaker 10: weren't expected to be immediate at LISTA.
Speaker 2: I'm praised you brought up bliz Trus for a bunch
Speaker 2: of reasons, including this one. The former British Prime Minster
Speaker 2: eventually left, had to reverse policy, made a scapegoat of
Speaker 2: a chancellor. It's a very different moment for this moment
Speaker 2: in the United States. I don't see that happening anytime soon.
Speaker 8: Well, I don't foresee President Trump stepping down. It's unclear
Speaker 8: who he can escape goat. This was what he promised,
Speaker 8: promise has made, promise is kept. And there are a
Speaker 8: lot of people who say ultimately that the goal is
Speaker 8: the right one. But you raise a great point, what's
Speaker 8: the off ramp? How much do you say that what
Speaker 8: we are seeing right now is a structural change that
Speaker 8: is going to last where you cannot get these relationships
Speaker 8: back in the same kind of way.
Speaker 2: Tony's good to see you, as always, Thanks for very
Speaker 2: thank you, Tony for sensei there of PIMCO. This is
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